The Breakdown - Bearish or Bullish? What Oil, DeFi Hacks and Cash Hoarding Tell Us About Markets

Episode Date: April 20, 2020

It’s hard to look at recent news from both crypto and traditional markets and not feel like we’re getting pretty mixed signals. Stocks have been recovering, but oil is hitting historic lows. DeFi suffers a major hack over the weekend, but Coinbase sees a major spike in $1200 transactions right as $1200 stimulus checks hit. Cash hoarding is giving pretence for eliminating privacy-preserving money, but one of the world’s most successful hedge funds has authorized investment in bitcoin futures.  On today’s episode of The Breakdown, NLW separates bullish from bearish signals for the strange in between times.

Welcome back to the breakdown. An everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The breakdown is distributed by CoinDesk. Welcome back to the breakdown. It is Monday, April 20th. And I should probably make a 420 joke, but I don't have it in me. So today what we're going to do is we're going to look at a bunch of the conversations and happenings and news from this last weekend and put it into

one of two categories. So this is a bullish versus bearish, what recent news should make us think about Bitcoin or crypto or the markets at large. Basically, I wanted to find a way to talk about recent news that wasn't just, here's a thing that happened, but put it in some context. And the reason that I think this might be relevant right now is that we're in this very weird feeling in between moment where it seems like in certain contexts this COVID-19 crisis has plateaued and maybe is on the way down from a health perspective, right? I think New York is the epicenter of this in the U.S. and we're seeing some progress there. Now the question becomes how to open up intelligently, how fast different markets are going to recover, how long and how severe the knock-on effects

are going to be. And so it's still, although we're hungry for the things around us to be better and back to some sense of normal, there's still a long way to go. And as we try to piece through that, there are real different indicators that can maybe help us understand where we are. Obviously, I'm going to focus a little bit more on the context of the Bitcoin and Crypto markets being that this is the breakdown and that's kind of where our focus is, but I'm not going to restrict it to that. With all that said, let's dive into Bullish versus Barish. We're going to start with Bearish, and we're going to start with probably the biggest conversation in the crypto world this weekend, which is the DeForce hack.

So first, what happened? And then second, why is it bearish? Well, what happened? Deforce is a China-based DeFi startup. They run a lending protocol called LendFME, and they had recently integrated in January with I'm BTC, which is an Ethereum token pegged one-to-one with Bitcoin. Well, that seems to have caused quite a problem.

Over the weekend, $25 million that were locked up in LendFME through DForce were exploited. and basically gone almost immediately. So Mindao Yang, the CEO of DeForce, wrote in the recap of this attack, We know that the hackers used a vulnerability with the combination of using ERC-777 tokens and DeFi Smart contracts to execute a re-entrancy attack. The callback mechanism enabled the hacker to supply and withdraw ERC-777 tokens repeatedly before the balance was updated. So for those of you who are interested, there's a lot more that you can get into in terms of the specific way in which this was executed.

But the key thing from a story standpoint in terms of what happened is that a major defoy exploit that led to the loss of $25 million. Now, currently they are, DeForce is talking with both the attacker as well as law enforcement. So we'll see what happens, right? The story isn't exactly done. But that's the big banner headline, 25 million gone into defy exploit. Why is this bearish? Well, I don't think this is super complicated, but let's get into the specifics. First, they had just received, DeForce had just received money from multi-coin, a $1.5 million

round. It was announced excitedly, I think, at the beginning of or middle of last week. And so a lot of folks were talking about the rise of defy in Asia and why Asia was going to be an increasingly important market vis-a-vis defy. We've seen this in the context of USD-backed stable coins that have been hugely on the rise. in Asia and around the world, really, as the world hungers for dollars in the wake of this COVID-19 crisis. So they had just received money, so this is a particularly bad time because it really slams the door in the face of that excitement.

Second, this was not a platform that was without controversy already. There had been accusations that the Deforce had outright stolen compounds code for Lend-Efme, right, the first iteration of their code. Now, I think that this is a little bit more complicated than it seems if only because what it means to actually be open source and copy is, I think, a reasonable debate or discussion to have. But still, there are a lot of folks who are not the biggest fans of Deforce already because it was pretty clear that they had taken the first iteration of compounds code for this lending platform. You can discuss whether that's right or wrong in the context of open source, but it was a thing. So you have this exploit from a platform that has already has controversy around it. Third, this was apparently a known vulnerability, this IMBT hack, which had been used in other

exploits and which had been discussed in an audit of Uniswap by consensus last year. So that's really kind of rubbing salt in the wounds when it's one thing if there's new exploits, you know, unknown unknowns that happen, which still, by the way, hugely increased the risk profile of Defi as a whole, but when it's a known potential exploit and it's not addressed, it just seems extra irresponsible. So that's a third part about why this is so bearish. Fourth is just the obvious one, which is what this does to the Defi narrative, right? Defi had been surfing on a wave of excitement and look at all these things that it can do and, you know, big interest rates for lending and holding your assets, locking up your assets, and then a huge vulnerability comes along. Now,

this is a kind of still secondary platform relative to, I think, a lot of the main brands in the space so far, even though it was growing quickly. And so there are, there's countervailing forces, right? Like, at least this wasn't MakerDAO. Still, the biggest challenge that Defi has is for people to believe that it's not just going to be an endless series of exploits, that it's actually safe, and that it can be safe in a way that preserves decentralization. And that's a very, very tough task. This sets that back. And I think it sets it back at a time when Defi really wanted to be pitching and articulating a narrative for itself in a post-COVID-19 world where people want a different type of larger financial system. It seems, frankly, that this just isn't ready for prime time,

or at least this type of thing increases people's perception and belief that it isn't ready for prime time exactly at the time when it would be good to be ready to move in. So it's just bad timing, but I think highlights the risks and why Defi is still so nascent. I don't think it's the end of defy by any stretch of the imagination, but it is a rough couple days. It's a rough exploit, and certainly the community is grappling with it now. That's our first bearish in Bullish versus Barish. It's hard to say.

Let's move on. Next up, we have Bullish. Another widely chattered about bit of news was that the Renaissance Technologies, which is a hedge fund that manages something like $75 billion, or really a collection of funds that has $75 billion in total assets under management, has opened the door in a legal filing to investing in Bitcoin futures via the CME. Specifically, they are open to investing in Bitcoin futures via the CME through its $10 billion medallion fund, which is a smaller fund within the larger $75 billion.

Why is this bullish? Again, it's quite obvious in some ways, but one, just generally showing that there's more interest, right? When you see clear indications that a major institution, a major player from the traditional financial world is more interested in Bitcoin, that's a good thing, right? That gives more people permission because of signaling to actually go spend time figuring out what their feelings about Bitcoin are, right? So that's one. There's just a general positive impact when legacy players open the door to getting involved in Bitcoin. Second, this is a particularly well-timed bit of news or announcement, given that just this week, Renaissance was written up in the Wall Street

Journal for how they are massively outperforming the markets right now. So on Friday, the Wall Street Journal reported that they had gained 24% year-to-date, even in the context of this massive market volatility, even in March, which was obviously just wild for everyone, they had grown 9.9%. And this is after fees and they have very, very hefty fees. So this is actually looking like it might end up being one of this fund's best year. So the fact that this fund is making news on the one hand for its performance in a very difficult time and at the same time as making news for opening the door to Bitcoin futures is a bullish signal for Bitcoin, no doubt. All right, our next up is another bearish. We're going to talk about oil. And like I said, I'm focusing mostly on the Bitcoin

in crypto context, but it's hard not to see everything as somewhat connected in this crazy moment. So what happened? The price for a barrel of crude to be delivered next month, so futures, fell 40% to $11 in Monday's trading, which is the lowest price in two decades. Now, it's no secret that oil has been just battered and this was going on almost independently initially of coronavirus in the context of this kind of issue between the Saudis and Russia in terms of production, but it's being exacerbated now by the huge demand shock of COVID-19, right? People just aren't using oil. They don't need oil. We're not moving around. And so there's all this oil floating around in the markets because of this other thing going on.

So you have a supply shock, a massive supply increase and a demand shock all at the same time. And it's creating just chaos in the oil markets from a financial standpoint. Why is this bearish? What does this have to do with what we're spending our time on over here in Bitcoin and Crypto? Well, I think that part of it is just it's representative of a larger set of knock-on effects of COVID-19 that we're just beginning to see now. As much as markets are trying to remain calm and price in the idea that everything is fine, it seems to me that almost no one who's really paying close attention is really buying it. It feels like this is the end of the beginning of coronavirus, not the beginning of the end. And those knock-on effects could be really significant. China is reporting fears around a potential food crisis.

So it's not like this thing just goes away. It's not like we just kind of press a button and everything is back. And so in that context, there are a large set of actors for whom Bitcoin remains a risk on asset. You know, we've seen this over the last month and a half, that when people had to flee to liquidity, when people had to flee to cash, Bitcoin got caught up in that as well. And so while the rest of the market remains volatile or even goes back down again, Bitcoin is likely to remain suppressed as well. So in that way, this is bearish, right? The things that go on in the larger markets, which I'm using oil as kind of an example right now, do potentially have an impact

on Bitcoin. Now, there's a whole bunch of caveats with the bearishness of this one. caveat one is that it's really all about your take in terms of your time preference as it relates to bearishness. Obviously, the short-term price of oil doesn't actually have anything to do with Bitcoin as an asset and the value proposition of Bitcoin as an asset. So for those who are looking at this as a larger period of crisis, which frankly is what kind of Bitcoiners are pretty well suited to, it's a good buying time. If the price goes back down, they're going to see it as a good buying time. One of the things that last month's crash really showed us is where that bottom level of buyers of last resort, Hodlars of last resort exists, and it's pretty strong. That's part one of the

caveats. Caviot, too, to the extent that markets do continue to flail, and to the extent that the position of central banks is to intervene at all costs, to have unlimited cash, to have unlimited credit and lending facilities, it continues to make the intellectual point for Bitcoin, which really just keeps pushing this industry to new people, right, from a narrative perspective. And in fact, that caveat number two perfectly brings us to our next bullish indicator, which is stimulus cash on Bitcoin. All right, stimulus cash on Bitcoin. What happened and why is this bullish?

So what happened? Coinbase noticed a spike in $1,200 deposits. So obviously last week, U.S. citizens finally started to get their their stimulus checks, and Brian Armstrong, the CEO of Coinbase, posted a picture of a chart, which showed basically the percentage of transactions on Coinbase that were exactly $1,200. They had been floating for a long time around 0.1%, right? That's their base level. And suddenly, they spiked at the exact moment that these checks started to hit, 4x growth to 0.4%. So 0.4% of these transactions were exactly $1,200.

Now, CoinDesk and the Block went out and talked to other exchanges. They talked to Binance, who seemed to confirm the same. This is a little anecdotal. There's a lot of information that we don't have or contexts that we don't exactly have. But still, I think it's highly unlikely that this is a pure coincidence, right? When you see just how precisely this bounce lines up with the actual distribution of these $1,200 deposits. So why is this bullish? I don't really think I need to go that deep on that. Obviously, the fact that there are people who are

taking and choosing to deploy this capital, this influx from the U.S. government into Bitcoin shows that there's a real strength at this base hodler market and potentially strengthen new people who want to come in. Obviously, there's a lot of folks for whom that $1,200 not only is not expendable on Bitcoin, but is barely going to be enough to cover what they have going on. But it is good to see that for those folks who don't need that money immediately, but who because of the way that the stimulus worked still got it, are deploying it against this asset that we're so excited about. All right, one more round of bearish and one more bullish. So bearish first. Russian cash hoarding. This is a little bit of a weird one, but bear with me for just a minute. So what happened?

This was from a coin desk article that was relating something from BN, Bloomberg. Basically, 1 trillion rubles were withdrawn in March from ATMs and banks, which was more than all of 2019 in Russia. So basically, whereas the U.S., folks in the U.S., as the coronavirus hit, were hoarding toilet paper, Russians were actually hoarding cash. Now, why were Russians hoarding cash and the U.S. weren't? I think you can debate a lot about different kind of psychologies, different banking infrastructure, different banking rules around taking out cash, different perceptions in media about what the impacts might be, yada, yada, yada. But the key point from a what happened standpoint is more was withdrawn in March than

was withdrawn in all of 2019 in Russia. So why is this bearish? One of the subtext, one of the potential second order effects of coronavirus and this crisis is more and more incentive and more and more justification for governments to eliminate cash entirely. So there's a lot of different pieces of that narrative, but the health impact is one of them that's been the most surprising, right? So, you know, if the coronavirus can live on cash, that's one thing. Even issues with technology that as it exists now where you have to press, you know, a pinpad or

whatever as you're paying with your ATM, all of these things suggest for more digitization of money, which on the one hand brings with it a lot of benefits of convenience, but the biggest issue, of course, is privacy. We're dealing with so many new privacy issues or expanded privacy. privacy issues because of COVID-19. Right now in the U.S. we're having a national conversation about contact tracking and tracing that relates to how we manage a continued public health threat. And that was a part of a conversation last week on the show as well. So this idea that folks in a country are withdrawing a huge amount of cash, I think is going to naturally make governments want to have more control over how cash is withdrawn. And if you do have a purely digital

system or a massively primarily digital system, you can exert more control over the actual flow of cash, right, of money in ways that might not be great for individuals, even if they are justified on the basis of keeping the system running. So I think that this Russian cash hoarding is one tiny example of a much larger phenomenon that is bearish for those who think that privacy preserving cash is an important part of the monetary ecosystem, which is that governments are just have more incentive and more justification for trying to eliminate cash than at any time before. So that's our last bearish.

Let's get to our last bullish. This is a fun one. This is a great story of community. Yesterday, Huddled American, who's a very vocal bitcoiner on crypto Twitter, on Bitcoin Twitter, wrote a thread that started, I don't have to tell you things are bad. Everybody knows things are bad. It's a depression. Everybody's out of work or scared of losing their job.

The dollar buys a nickel's work. Banks are going bust. Shopkeepers keep a gun under the counter. And it goes on. And it's basically a big invocation to go sack stats. So later on in the thread, he says, I want you to sack sats. I don't want you to protest. I don't want you to riot.

I don't want to write your congressman because I wouldn't know what to tell you what to write. And it ends. But first, get out up out of your chairs, open the windows, stick your head out and yell and say it. I'm stacking sats and I'm not going to take this anymore. And then he says, lull, I got bullish off my own tweet, had to do it. And he showed a purchase record of more BTC. So this is fun. This is very on brand.

This is part of what I think makes the Bitcoin or ecosystem so interesting. and so fun is that it has these voices who are unafraid of just being permables and screaming over and over and over for anyone who needs to be reminded of how big a base community there is. And when we're talking about trying to invent and frankly meme our way into a new way of looking at money, you actually kind of need those missionaries, right? That's just there's no way around it. So that was the original context. And then a person by the name or who goes by Atlas at Ancap Children wrote,

You can only respect when a man puts his money where his mouth is. I salute you, sir. And if minimum wage in my country wasn't 2,500 USD per year, I would be buying sats like a crazy person. I've been doing my part, though. I'm not all talk. It took me two months and it's almost nothing, but here's what I got. Greetings for Columbia. I will never let them steal my money again.

You inspire me, bro, for real. And he showed basically his Bitcoin account, which had the equivalent in USD of effectively 20 bucks. And so this is a person who's from Columbia, who's, you know, bought into this idea of Bitcoin. He wants a way to have his wealth in a place where it can't get stolen either literally or figuratively in the context of inflation. And so Hoddle American responded, send me an address. And here's what happened next. Hottle said, boosted, good luck on your journey. You cannot sell the million stats. I just sent you for 10 years. That's our deal man to man. So basically, Haudill sent him a million sats. It's equivalent of about 70 bucks, US, and an interesting

thing happened. Other bitcoins are started to chime in. And all of a sudden, there were 50 people who had sent him a few sats, and then 100 people who had sent him a few sats, and then 150. And all of a sudden, it became this mission to get Atlas to be a full whole coiner. And when all was said and done, close to 200 people contributed across lightning and other ways, and he became the world's newest hole coiner. What is cool about this? I mean, first, obviously, an individual's life changed, and I don't ever want to diminish that, right? It's so easy when we talk about big patterns and big trends to lose sight of individuals, but this is a person for whom, arguably, their life just changed in a meaningful way because of a random set of internet strangers in internet and

interactions. So that's one. Second, I love when you see Bitcoiners putting their money where their mouth is as a community, right? This is a group who are often unwilling to even be called a community. I think that most Bitcoiners would rather be seen as a set of people with a kind of a similar outlook who can come together when they need to to do things to influence the world, but also who operate in kind of their own spheres. And I love seeing that these moments where they actually do come together and they manifest a community, even if they're not. it's for just a short time. So that's part two. Part three, individual acts matter. It matters when you have these stories. These are the things that change people's sense of the possible. People's sense of

the possible is dictated by what they have seen, what they have experienced. When you have the example of this group of people who are interested in this different future of the world actually showing up and doing something, it's going to impact how people look at that group of people. Now, maybe it'll only be insiders who know this, but who cares. Right now, it's okay for us to be focused on who we want to be as insiders, who we want to be as early adopters. That's going to set the tone for when new people come in. So I loved seeing this. I think it's an amazing community initiative that just kind of spontaneously happened. It's the type of thing that couldn't happen outside of the context of Bitcoin and the internet. So I love it. It's as bullish as you can get to me.

All right, guys, so that is bullish versus bearish. a few different stories, a few different conversations from the weekend and where they leave us. Like I said at the beginning, I think we're in a weird in-between moment where there's going to be a lot of mixed signals for a while. There's going to be things getting better, things getting worse, things that we didn't realize would be better, things that we didn't realize would be worse. And all we can do is we try to navigate it is just kind of come into it open and do our best to understand what the signals are telling us rather than trying to map it onto some pre-existing mental model. So that's what I'll be trying to do. I've got a bunch of great guests this week that will help us with that. So thanks for hanging out, as always, guys.

And until tomorrow, be safe and take care of each other, all right? Peace.